TPVG - TriplePoint Venture Growth: I Am Aggressively Jumping On This 14% BDC Yield

2023-08-11 06:46:54 ET

Summary

• TriplePoint Venture Growth BDC's stock price dropped after presenting second quarter earnings, creating a buying opportunity for passive income investors.
• Despite an increase in bad loans, TriplePoint Venture Growth BDC continues to cover its dividend with net investment income.
• The BDC's credit quality has deteriorated, but it still maintains good dividend coverage and a stable dividend for the third quarter.

A new investment opportunity has emerged, in my view, for TriplePoint Venture Growth (TPVG) whose stock price dropped after the business development company presented second quarter earnings in the previous week.

TriplePoint Venture Growth BDC remains an appealing choice for passive income investors despite an increase in bad loans, because it continues to cover its dividend with net investment income.

I had a positive opinion on TriplePoint Venture Growth BDC in March and think that last week's widely exaggerated drop is an excellent buying opportunity for passive income investors to buy a covered 14% dividend yield while it is cheap.

Yet Another Stock Price Drop Passive Income Investors Can Capitalize On

TPVG sold off during the March crisis in the U.S. bank system, then again after 1Q-23 results and again last week after the BDC presented results for the second quarter.

The drop in TriplePoint Venture Growth BDC's stock price happened primarily because the company reported an increase in bad loans that in turn affected the market's confidence about the BDC's dividend health.

As I will show later in this article, passive income investors don't have a reason to panic as TriplePoint Venture Growth BDC continues to outearn its dividend with net investment income, despite a rather steep increase in non-accruals in the second quarter.

TriplePoint Venture Growth BDC's Portfolio And Credit Quality

TriplePoint Venture Growth BDC is not your typical BDC. Like Hercules Capital, TriplePoint Venture Growth BDC has a niche focus on venture backed companies which distinguishes the company from other BDCs that invest across in every sector of the economy.

Primarily, TriplePoint Venture Growth BDC lends capital to venture capital backed companies in their growth stages and the company targets 10-18% returns for its debt investments.

TriplePoint Venture Growth BDC maintains a debt focus, but also invests in Equity and Warrants in order to boost its capital returns. The BDC owned an investment portfolio valued at $941.9 million (based on fair value) at the end of the second quarter which included 853.2 million in debt investments (91%). The remaining 10% are equally split between Equity and Warrant positions.

Cause Of The Sell-Off, No Impact On Dividend Coverage

TriplePoint Venture Growth BDC suffered a deterioration of its credit quality in the last two quarters with some of its loan investments being put on non-accrual status.

TriplePoint Venture Growth BDC's non-accruals increased from 8.3% in 1Q-23 (on a cost basis) to 11.0% in 2Q-23 and this rise in bad loans has been the reason behind last week's selloff. Despite the deterioration of credit quality, however, TriplePoint Venture Growth BDC maintained good dividend coverage and the BDC also declared stable dividend for 3Q-23.

Before selling stock of a BDC in response to an increase in the non-accrual ratio, I always recommend to take a look at the different coverage metrics because when a BDC still covers its pay-out with net investment income, then passive income investors don't have a reason to panic (or worse, sell at a loss).

TriplePoint Venture Growth BDC earned $0.53 per share in net investment income in 2Q-23 which was unchanged from the previous quarter. Despite an increase in bad loans lately, the BDC also produced rather stable pay-out ratios between 71% and 81% in the last year.

In the last two quarters, TPVG reported a dividend pay-out ratio of just 75% which gives the BDC a good margin of safety even if the BDC fails to collect interest on some of its debt investments.

TriplePoint Venture Growth BDC: A Dip-Buying Opportunity

TriplePoint Venture Growth BDC is now selling at a 5% premium to net asset value compared to a 17% premium before the release of 2Q-23 earnings. Investment losses, unfortunately, caused a 9% drop in net asset value in the second quarter, but it seems to me that investors too scared right now which is exactly why I think there is some good value to be found in TPVG.

Though TriplePoint Venture Growth BDC's net asset value declined QoQ, the BDC has sold at a premium to net asset value for a long time and traded at substantially higher net asset value premiums, too. Once investors have absorbed the initial shock, I think there is an opportunity here for a valuation re-rating.

Could Things Get Worse For TriplePoint Venture Growth BDC?

Theoretically, yes. TriplePoint Venture Growth BDC has suffered a steep rise in non-accruals in the second quarter, but that does not mean that some value of those investments won't be recaptured at a later stage. As such, passive income investors should carefully watch TriplePoint Venture Growth BDC's non-accrual ratio and, even more importantly, the BDC's dividend coverage.

My Conclusion

I think passive income investors have a contrarian investment opportunity here with TriplePoint Venture Growth BDC since the market appears to overshoot to the downside after the BDC's second quarter results.

Though TriplePoint Venture Growth BDC has seen an increase in non-accruals (bad loans), the BDC nonetheless covered its dividend with net investment income, and has consistently done so over the last year.

Taking into account the market's selloff following the earnings release, I think that TPVG is a speculative strong buy and that the 14% dividend yield is sustainable.

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